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BEING STREET SMART
By Sy Harding
INVESTORS
NEED FACTS FROM
WALL STREET
NOT FICTION! July
4, 2008.
If
ever investors needed honesty and help from Wall Street and tout TV, it's now,
with another bear market apparently underway. But they're not getting it.
What
they've been getting all the way down is assurances that it's always a good time to buy, certainly advisable to hold on, and
incorrect information as to what constitutes defensive positions for those who
would prefer to have more defensive positioning.
In
an interview on financial TV last week a Wall
Street type ridiculed investors who are now holding high levels of cash, saying
"What good will cash at 2% interest do you?"
Well,
pal, it sure as heck beats losing 20% or 30% doesn't it?
Or losing 40% to 60% in the financials and housing stocks, and emerging
markets that you and your Wall Street cohorts have been recommending all the way
down.
In
answer to tout TV's constantly repeated question of "What should
investors be buying today?" Wall Street representatives invariably say, "In
times like this, it's necessary to diversify into 'defensive stocks and
sectors', including the big blue chips with international operations, and
companies that have the wind at their backs because even in recessions people
still have to eat, drink, and take their medicines. They won't go down as much
as the overall market."
Huh?
You should try to find companies and mutual funds that will lose less than the
rest of the market? Like losing only 25% in a 35% bear market is good for your
financial health?
Not
a word about the opportunities to sell short or take positions in bear-type
mutual funds or inverse etf's', which are making significant profits in the
market decline.
But
even Wall Street's assurances that such 'defensive' stocks will lose less
than the overall market are not based on fact. Stocks most recommended as
defensive stocks in 2000 as the 2000-2002 bear market got underway included the
likes of Alcoa, Bristol Myers Squibb, CitiGroup, Coca-Cola, Disney, DuPont,
Fannie Mae, General Electric, Home Depot, IBM, Merck, WalMart, and a few others.
But they plunged an average of 59% to their bear market lows, worse
than the Dow's decline of 'only' 38%, and the S&P 500 decline of 49%.
The
other day an institutional money manager was making a strong case for buying a
certain beaten down stock in a financial TV interview. Normally, the interviewer
would have summed up by saying something like, "So, there you go folks, Jack
thinks it's time to buy XXXXX." But this time there was a follow-up
question, "So you think XXXXX has bottomed?" To which, after a moment's
hesitation, the manager's answer was, "Well, it might not bottom for another
six to nine months. But it may be a good time to begin building a position."
Begin
building a position? An institutional manager with many billions to get invested
might have to start 'building a
position' six months before he expects a stock to bottom. Even that is a
stretch. It would take many days, probably weeks, to get half a billion into a
stock without affecting its price excessively. But a typical individual investor
is more likely to be talking about investing $5,000 to $50,000 in any one
position, and they can invest that amount all at once and in two minutes or
less.
So
wouldn't helpful advice be to wait until the stock seems to have bottomed,
which may be six months out (if that is what his work is telling him). But no,
the advice is to start buying today even though he thinks the stock will likely
continue down for six months. Investors must keep buying, never selling.
A
couple of weeks ago, a Wall Street type made the statement on financial TV that
bear markets average a decline of 'only' 30%. It seemed to be an effort to
assure investors that this bear market has only another 10% to go at worst, and
probably less.
The
media dutifully repeated that statistic here and there and over and over,
apparently without checking it, until it is now accepted as fact.
But
it is not.
Over
the last 100 years there have been 24 bear markets, or one on average of every
4.1 years. Their average decline was 36%. The average decline of the ten largest
bear markets was 48%. But even those declines were the declines of the
conservative blue-chip Dow. So it's a safe bet that a typical investor's
holdings lose considerably more in a bear market than the
30% Wall Street
suggests.
But
bear markets also have significant bear market rallies, which in the past have
amounted to as much as 25%, before they reach their ultimate lows, well worth
going after.
So
in my opinion market-timing is still the way to go. We have had our subscribers
on a sell signal since taking profits from the March/April rally (a bear market
rally) in May, and positioned substantially for the downside in 'inverse'
etf's. But we'll be watching for the next buy signal, which may not mark the
end of the bear market, but could well result in a significant rally.
Meanwhile,
Wall Street will have to change its bias if it is going to try to help
investors. Constant advice to buy only works in bull markets.
Sy Harding is president
of Asset Management Research Corp., DeLand, FL, publisher of www.streetsmartreport.com
and the free daily blog www.syhardingblog.com.
He also authored 1999's timely book Riding The Bear - How To Prosper In
the Coming Bear Market.
He has a new book out, Beat the Market the
Easy Way - Surprising Seasonal Strategies that Double the Market's
Performance. Autographed copies are available at discount from his website
for same day shipment.
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